Weak British pound triggered by Brexit could boost GSK earnings

London-based GlaxoSmithKline makes Advair at a manufacturing facility in Zebulon. A weak pound benefits Glaxo because it sells most of its drugs outside the United Kingdom. Chris Sewardcseward@newsobserver.com

London-based GlaxoSmithKline makes Advair at a manufacturing facility in Zebulon. A weak pound benefits Glaxo because it sells most of its drugs outside the United Kingdom. Chris Sewardcseward@newsobserver.com

GlaxoSmithKline’s disclosure that the weak British pound could boost its second-quarter revenue by 6 percent or more could be a harbinger of things to come given that the Brexit vote has caused the value of Great Britain’s currency to plunge.

In an advisory issued Monday, London-based GSK said that when it reports its second-quarter earnings July 27, revenue is expected to be boosted by “around 6 percent to 7 percent” as a result of “the positive impact of foreign exchange.” The company, whose North American headquarters is in Research Triangle Park, also said that earnings per share likely would get an even larger bump.

The impact of foreign exchange rates on GSK’s earnings is based on the average rates for the quarter that ended June 30. Since the Brexit vote that calls for Great Britain to withdraw from the European Union was taken June 23, only a handful of post-Brexit trading days figured into that equation.

GSK’s advisory about a boost in revenue and earnings reflects that the pound was trending downward even before it was pummeled in the wake of the Brexit vote, said Sam Fazeli, senior analyst at Bloomberg Intelligence.

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Fazeli said he wouldn’t be surprised if GSK executives, during their second-quarter conference call, project that for the full year the company’s earnings per share could get a 15 percent or 16 percent boost if the value of the pound hovers near its current level. By contrast, when Glaxo reported its first-quarter financials it projected that earnings per share for the year would get an 8 percent boost from exchange rates.

Like publicly traded U.S. companies, GSK also reports revenue and earnings based on “constant exchange rates” that adjust for fluctuations in currency.

A weak pound benefits GSK because the maker of asthma inhaler Advair and other drugs sells most of its drugs outside the United Kingdom. As a result, purchases made in, say, U.S. dollars, end up being worth more when those dollars are converted to pounds.

To be sure, the currency boost doesn’t qualify as an “operational benefit,” Fazeli said, because it would be solely due to currency fluctuations. But it’s not illusory because GSK ends up with more cash as a result.

The official position taken by GSK, which employs about 2,600 workers in RTP and 800 at a manufacturing plant in Zebulon, is that Brexit will pretty much be a non-event for the company.

“Although the EU Referendum result creates uncertainty and potentially complexity for us in the future, we do not currently anticipate a material adverse impact on the business,” GSK said in its only statement to date on the subject. Company spokeswoman Jenni Ligday declined to elaborate.

Fazeli agrees that, from a longer-term perspective, Brexit won’t have much of an impact. But, he said, “from a currency perspective, it will give them a boost in the near-term.”

Tax cut

A plan to ease corporate taxes in Great Britain could benefit GlaxoSmithKline and other U.K. companies.

Last week, British Treasury chief George Osborne said he plans to cut the U.K. corporation tax to below 15 percent to encourage investment and ease business concerns after voters chose to leave the 28-nation European Union.

Some London-based businesses are considering leaving for other European cities – Paris, Berlin, Amsterdam – to benefit from the EU’s large common market.